Bear Radar

Style Underperformer:

• Large-Cap Value (+1.29%)

Sector Underperformers:

• 1) Gold & Silver -3.10% 2) Homebuilders -1.10% 3) Oil Tankers +.19%

Stocks Falling on Unusual Volume:

• BAC, GFI, GOLD, RP, LBTYA, MSG, SSRI, TZOO, TIN, GS, WSM, LFC, GTU, HIG and GORO
  

Stocks With Unusual Put Option Activity:

• 1) UUP 2) KBH 3) BCS 4) XLK 5) XCO
  

Stocks With Most Negative News Mentions:

• 1) STP 2) PEG 3) LNCR 4) ROK 5) CAVM
  

Charts:

• ETFs Falling on Unusual Volume
• Stocks Falling on Unusual Volume
  

Bull Radar

Style Outperformer:

• Mid-Cap Growth (+1.59%)

Sector Outperformers:

• 1) Hospitals +3.59% 2) Internet +2.38% 3) Computer Services +1.89%

Stocks Rising on Unusual Volume:

• SNP, GSK, PANL, PWRD, FMCN, ARMH, MPEL, SNPS, ACOM, FOSL, OCR, TSL, ANR, PMC, ECL, COH and MDT
  

Stocks With Unusual Call Option Activity:

• 1) TOL 2) PANL 3) AUY 4) ARMH 5) GLL
  

Stocks With Most Positive News Mentions:

• 1) LMT 2) NVDA 3) XEL 4) COF 5) WSM
  

Charts:

• ETFs Rising on Unusual Volume
• Stocks Rising on Unusual Volume
  

Tuesday Watch

Evening Headlines

Bloomberg:

• European Failure to Solve Region's Banking Crisis Returns to Haunt Markets. Four years to the month since the global credit crisis began, European lenders remain dependent on central bank aid, plaguing markets and economies worldwide. Emergency steps such as unlimited loans from the European Central Bank are keeping many banks in Greece, Portugal, Italy and Spain solvent and greasing the lending of others, while low interest rates and debt-buying are containing borrowing costs. Such aid is needed as concerns about slowing economic growth and sovereign debt prompt banks to curb lending, stockpile dollars and hoard cash in safe havens. “I’m not sleeping at night,” said Charles Wyplosz, director of the Geneva-based International Center for Money and Banking Studies. “We have moved into a new phase of crisis.” The signs of distress are widespread and mounting: Banks deposited 105.9 billion euros ($152 billion) with the ECB overnight on Aug. 19, almost three times this year’s average, rather than lending the money to other lenders. The premium European banks pay to borrow in dollars through the swaps market increased yesterday for a fourth straight day. European bank stocks have sunk 22 percent this month, led by Royal Bank of Scotland Group Plc (RBS) and Societe Generale (GLE) SA. Edinburgh-based RBS, Britain’s biggest government-controlled lender, has tumbled 45 percent, and Paris-based Societe Generale, France’s second-largest bank, dropped 39 percent. The extra yield investors demand to buy bank bonds instead of benchmark government debt surged to 298 basis points on Aug. 19, or 2.98 percentage points, the highest since July 2009, data compiled by Bank of America Merrill Lynch show. The cost of insuring that debt against default surged to a record yesterday. The Markit iTraxx Financial Index linked to senior debt of 25 European banks and insurers rose to 250 basis points, compared with 149 when Lehman collapsed. “The debt has been transferred from the banks to the sovereign, but it hasn’t actually been eradicated,” said Gary Greenwood, a banking analyst at Shore Capital in Liverpool. “Until the sovereigns get their balance sheets in order, then these concerns are going to remain.” Funding markets have seized up as investors speculate that sovereign debt writedowns are inevitable. Banks in the region hold 98.2 billion euros of Greek sovereign debt, 317 billion euros of Italian government debt and about 280 billion euros of Spanish bonds, according to European Banking Authority data. The difference between the three-month euro interbank offered rate, or Euribor, and the overnight indexed swap rate, a measure of banks’ reluctance to lend to each other, was at 0.67 percentage point on Aug. 22, within 3 basis points of the widest spread since May 2009. “The central bank is the only clearer left to settle funds between banks,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG (CBK) in Frankfurt. “There is a mistrust between banks in general, between regions and with dollar providers overall.”
  
• European Banks Must Pay Up to Borrow $100 Billion Amid Crisis: Euro Credit. European banks with more than $100 billion of cash to raise by year-end will have to pay up because investors perceive them as the worst credits they’ve ever been. The cost of insuring the senior and junior bonds of 25 banks and insurers doubled since April, according to the Markit iTraxx Financial indexes of credit-default swaps. The Euribor- OIS spread, a gauge of banks’ reluctance to lend to each other, reached the widest since April 2009 this month, while the cost for European banks to fund in dollars matched a 2 1/2-year high. “This return of generalized banking risk marks a new phase in the unfolding European drama,” said Lisa Hintz, an analyst in New York at Capital Markets Research Group, a unit of ratings firm Moody’s Investors Service. “Investors have heightened concerns about sovereign and financial institution risk.” Morgan Stanley’s estimate of the 80 billion euros ($115 billion) banks need until year-end doesn’t include the extra capital that regulators have ordered many to raise to protect against a re-run of the 2007 global financial meltdown. With the bond market shut to all but the strongest banks, weaker lenders, particularly those from the euro region’s so-called peripheral nations, are relying on the European Central Bank for its unlimited six-month loans. “The banks seem to prefer to deposit cash with the ECB rather than lend it out to others that need it,” said John Raymond, an analyst at the financial-research firm in London. “In itself, that’s a sign of stress in the interbank market” and means companies must also pay more to borrow, he said. The extra yield investors demand to hold bank bonds rather than benchmark government debt surged to 298 basis points, or 2.98 percentage points, according to Bank of America Merrill Lynch index data. That’s the widest spread since July 2009 and up from 220 at the end of last month. Average yields jumped to an almost two-year high of 4.46 percent on Aug. 12, before dropping back to 4.38 percent, the data show.
• Merkel Never Holding Hands With Sarkozy Betrays European Leadership Crisis. German Chancellor Angela Merkel and French President Nicolas Sarkozy have never held hands like Helmut Kohl and Francois Mitterrand once did at a World War I battlefield. Merkel worries they don’t even talk enough. After no fewer than seven one-on-one meetings the past 18 months -- in addition to parleys at summits -- the leaders of the biggest European economies have yet to hit on an effective solution to the crisis stalking the euro, Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said in an interview. “Poor relations between Merkel and Sarkozy are one of the big problems of dealing with the debt crisis because it’s up to European Union leaders to handle this,” Erixon said. “It’s not a personal relationship that can deliver grand things because the trust isn’t there.”
• Qaddafi Is a Hunted Man as Rebels Claim Tripoli. Libyan rebels hunted for Muammar Qaddafi and declared his regime over as the dictator’s forces kept up their fight in parts of Tripoli, the capital now mostly in rebel hands. Even as gunfire continued in some areas, particularly around Qaddafi’s former home, rebel and western leaders looked ahead to forming an interim government after the dictator’s 42- year rule. “The era of Qaddafi is over,” Mustafa Abdel Jalil, the head of the rebel National Transitional Council, said yesterday at a news conference in the eastern city of Benghazi. He called on rebel fighters to avoid reprisals, respect human rights and treat prisoners of war humanely. Qaddafi, who in a Aug. 21 audio broadcast vowed “never to give up,” remained at large.
• Goldman(GS) Debt Swaps Jump as U.S. Company Credit Risk Rises to 14-Month High. Investor confidence in U.S. corporate credit deteriorated to the worst level since June 2010 and the cost to protect Goldman Sachs Group Inc. (GS) debt jumped following a report that Chief Executive Officer Lloyd Blankfein hired a defense attorney. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 4 basis points to a mid-price of 126.8 basis points as of 5:35 p.m. in New York, according to index administrator Markit Group Ltd. Credit- default swaps on Goldman Sachs jumped 40 basis points to 255.4 basis points, the highest level since April 2009, according to data provider CMA. Contracts linked to the debt of Bank of America, based in Charlotte, North Carolina, added 38.6 basis points to 380.6, the data show. Investor confidence in high-yield, high-risk debt plunged for a third day to the lowest level in almost two years. The Markit CDX North America High Yield Index, which falls as investor confidence deteriorates, dropped 0.6 percentage point to 91.8 percent of face value, the lowest level since Sept. 10, 2009.
• Gold Tops $1,900 for First Time. Gold extended its rally to a record above $1,900 as mounting concern that the global economy is faltering spurred demand for bullion as a protection of wealth. Goldman Sachs Group Inc. lowered its forecast for U.S. growth in 2011 on signs that the recovery in the largest economy lost momentum. German Chancellor Angela Merkel attempted to shut the door on common euro-area bonds as a means to solve the debt crisis, saying she won’t let financial markets dictate policy. Gold futures for December delivery gained as much as 1.4 percent to $1,917.90 an ounce and traded at $1,911 at 6:34 a.m. Singapore time on the Comex in New York.
• Cerberus Kills Innkeepers Deal in Sign of Strain for Buyouts. Cerberus Capital Management LP and Chatham Lodging Trust terminated their $1.1 billion agreement to buy 64 hotels from Innkeepers USA Trust, a sign that the weakening economy is straining the private-equity market. Prices on leveraged loans, the backbone of the buyout business, have been falling. The move indicates deals may be more expensive to finance. The S&P/LSTA U.S. Leveraged Loan 100 Index rose to 88.59 cents on the dollar on Aug. 19 from 88.2 on Aug. 11, a 13-month low. The debt has lost 3.74 percent this year. Cerberus has abandoned deals before. The firm walked away from its $4 billion agreement to buy Greenwich, Connecticut- based United Rentals Inc. in 2007.
• More Regulations Is The Last Thing Economy Needs: Ramesh Ponnuru. At least one sector of the economy is booming, and President Barack Obama can legitimately take credit for it. Since he took office, employment has surged 13 percent at federal regulatory agencies. The regulators’ budgets are up 16 percent. (These numbers are derived from a May report published by Washington University and George Washington University.) And that’s before some of the major regulatory initiatives of the administration -- the financial-reform bill and the health-care overhaul -- are fully implemented. Obama understands that a reputation for regulatory hyperactivity in the midst of a weak economy wouldn’t help his re-election prospects. In January, he promised “a government- wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive.” That review led to some modest improvements: The Environmental Protection Agency pulled back a rule that would have treated dairy spills on farms as though they were oil spills. Overall, though, the regulatory burden on the economy is still growing.
• Korea Investment Adds $78 Million to Bank of America(BAC) Stake Amid Stock Rout. Korea Investment Corp., the country’s sovereign wealth fund, said it added $78 million worth of Bank of America Corp. (BAC) shares to its existing stake this year as the U.S. bank shed more than half its market value. The fund added shares from January via seven separate purchases using a $145 million dividend it earlier received from Bank of America and called the Charlotte, North Carolina-based bank’s shares “undervalued,” in an e-mailed statement late yesterday.
• Crisis Too Big for Developed World: Ex-IMF Head. The crisis threatening the global financial system exceeds the capabilities of developed nations and requires a new International Monetary Fund “debt facility,” former IMF head H. Johannes Witteveen said. “Unusual problems require unconventional solutions,” Witteveen wrote in an opinion piece in the Financial Times today. “The world’s financial system is threatened by a new crisis that could be even worse than that of 2008.” He was IMF managing director from 1973 to 1978.

Wall Street Journal:

• Fighting Flares in Tense Tripoli.
• Live Blog: The Battle for Tripoli.
  
• H-P(HPQ) Needed to Evolve, CEO Says. Apotheker Says PC Spin Off, Software Buy Sets 'Transformation' in Motion.
• Germany Expects Growth to Slow. Germany faces an "obvious slowdown" that may last the rest of the year, its finance ministry warned on Monday, days after Europe's largest economy reported an unexpected pause in what had until recently been a strong recovery. Despite weaker growth, Germany's budget deficit should shrink to just 1.5% of its gross domestic product this year, a small fraction of the deficits expected in the U.S., Japan and much of the rest of Europe. Germany's recovery "in early summer 2011 remained below expectations," the finance ministry said, citing a sharper-than-expected slowdown in the U.S. German consumption may continue to stall due to uncertainties surrounding the euro zone's continuing debt crisis. "In the coming third quarter, the current turbulence in the financial markets could lead to further slowdown" in domestic consumption, the ministry said.

CNBC:

• China HSBC Flash PMI Rises to 49.8 in August. HSBC's China Flash PMI showed the Chinese factory sector may have slowed slightly in August from July as new orders and new export orders eased on languid overseas demand. The flash Purchasing Managers' Index (PMI), designed to preview China's factory output before official data, edged up to 49.8 in August, from July's final reading of 49.3. That leaves the index a touch under the 50-point mark that demarcates expansion from contraction in activity. HSBC publishes its final China PMI index for August on Sept 1. The listless outcome attests to China's gently slowing economy, and does little to dispel market worries that global demand is faltering on Europe's persistent debt problems and sluggish U.S. growth.
• Buffett-Backed BYD Shares Fall After Profit Warnings. Shares in BYD, a Chinese auto and battery maker backed by U.S. billionaire Warren Buffett, tumbled more than 5 percent on Tuesday after the company warned it could face a loss in the third quarter due to soft sales. "A weak result was expected but it(Q3) seems to be much worse than expected," said Patrick Yiu, a director at CASH Asset Management. "It may see heavy sell off because of the results."

Business Insider:

• S&P President Steps Down Weeks After US Downgrade.
• Iran Has Started Moving Centrifuges To Boost Uranium Enrichment.
• Bank of America(BAC) May Need to Raise $40-$50 Billion of New Capital - Analyst.
  

Zero Hedge:

• Japanese PM Naoto Kan Is Out August 30.

Forbes:

• Taxpayers Should Be Leery Of Warren Buffett's Faux Noblesse Oblige.

NY Times:

• Members of Merkel's Party Emphasize Opposition to Euro Bonds. Chancellor Angela Merkel of Germany has faced harsh criticism for being too passive in the face of Europe’s debt crisis. But on Monday, members of her own party and the Bundesbank made it clear just how hard it would be for her to pursue any solution that asked German taxpayers to sacrifice for the sake of European unity. With many economists calling for Europe to expand the euro zone’s bailout fund or start issuing bonds guaranteed by all 17 of the countries that share governance of the common currency, German politicians at home struck back. “Euro bonds would push up German interest rates,” Philipp Missfelder, the foreign affairs spokesman for Mrs. Merkel’s Christian Democratic Union, said Monday after a meeting of the center-right party’s board. “The cost of servicing the debt would be enormous.” Meanwhile, the Bundesbank, representing the views of Germany’s monetary authorities within the European Central Bank, complained Monday that liabilities acquired by weaker countries were being offloaded onto the stronger ones. “A major step is being taken toward common assumption of risks from weak national finances and economic missteps,” the Bundesbank said in its monthly bulletin. “This weakens the foundation of fiscal responsibility and self-discipline.”

Seeking Alpha:

• CDS Market To Euro Banks - This Is Worse Than 2008. (graph)

Vanity Fair:

• It's the Economy, Dummkopf! by Michael Lewis. With Greece and Ireland in economic shreds, while Portugal, Spain, and perhaps even Italy head south, only one nation can save Europe from financial Armageddon: a highly reluctant Germany. The ironies—like the fact that bankers from Düsseldorf were the ultimate patsies in Wall Street’s con game—pile up quickly as Michael Lewis investigates German attitudes toward money, excrement, and the country’s Nazi past, all of which help explain its peculiar new status.

The Blaze:

• Egyptian Protestors Outside Israeli Embassy Bear Signs With Swastikas: 'The Gas Chambers Are Ready'.

Politico:

• Health Care Law Will Deepen Deficit. The White House sold "Obamacare" as an instrument for lowering health insurance premiums and reducing federal budget deficits. “Altogether,” President Barack Obama said, “our cost-cutting measures would reduce most people’s premiums, and bring down our deficit by more than $1 trillion over the next two decades.” Studies, however, reveal a far different picture.
• AFL-CIO to Form Super PAC. The AFL-CIO is getting ready to pump even more money into elections by forming a super PAC and targeting developments in the states, the Associated Press reported Monday.
  

Reuters:

• Goldman Sachs(GS) CEO Hires High-Profile Defense Attorney. Goldman Sachs Chief Executive Lloyd Blankfein has hired Reid Weingarten, a high-profile Washington defense attorney whose past clients include a former Enron accounting officer, according to a government source familiar with the matter. Blankfein, 56, is in his sixth year at the helm of the largest U.S. investment bank, which has spent two years fending off accusations of conflicts of interest and fraud. The move to retain Weingarten comes as investigations of Goldman and its role in the 2007-2009 financial crisis continue.
• US: Deutsche Bank(DB) Knew Mortgage Co It Bought Lied. Deutsche Bank AG knew in 2006 that a mortgage company it was preparing to buy lied to the U.S. government about its mortgages, yet went ahead with the purchase and should be held financially responsible, the Justice Department said on Monday. According to the department's amended $1 billion complaint filed Monday evening with the U.S. District Court in Manhattan, Deutsche Bank was "on notice of and expressly assumed responsibility" for wrongdoing at MortgageIT Inc, which it bought in 2007.
• Bernanke's No 'Tooth Fairy,' Fed's Fisher Says - FBN. U.S. Federal Reserve Chairman Ben Bernanke is "not the tooth fairy," a top Fed official told Fox Business Network on Monday, suggesting the Fed chief won't use a speech later this week to extend new monetary stimulus. "His job is not to leave presents under the pillow of people who have desires that may not be easily fulfilled," Dallas Federal Reserve Bank President Richard Fisher said, according to a partial transcript provided by the network. "Our job is to put things right in the long term." Asked what Bernanke will say at a highly-anticipated speech on Friday at an annual central bank conference in Jackson Hole, Wyoming, Fisher said "You'll learn when you hear him speak. Ben Bernanke's not the tooth fairy."
• S&P Upgrades Google(GOOG) Stock Days After "Sell" View.

Telegraph:

• Bank Shares Dive on Funding Fears. Bank shares dived on Monday despite a widespread rally across Europe's major stock markets as questions were raised about their ability to fund themselves.

MailOnline:

• Banks Plug Pensions Holes With Toxic Assets From Financial Crisis. Britain's banks are using toxic assets left over from the financial crisis to plug huge holes in their pension funds. HSBC and Lloyds have both injected assets they have found difficult to sell into their pension schemes, with the effect of reducing their pension deficits, while shifting problem assets off their balance sheets. Banks also gain from capital and tax relief on the transfers. Ros Altmann, director-general of Saga, said the move was a ‘wheeze’ that was ‘deeply worrying’ for bank workers and the taxpayer.
  

Globe and Mail:

• Teachers, Hedge Fund Target S&P Parent. Ontario Teachers’ Pension Plan, the investment manager that handles the retirement savings of nearly 300,000 teachers in the province, is one of McGraw-Hill’s(MHP) largest shareholders. It is also working with New York hedge fund, Jana Partners LLC, to push for a radical overhaul that would spell the end of the New York-based information giant as investors currently know it. And the pension fund’s chief complaint has to do with, of all things, the company’s education unit.

Nikkei:

• 70% of senior Japanese corporate executives surveyed by the Nikkei newspaper said the current yen-dollar rate hurts their companies' earnings.

China Securities Journal:

• China may as early as the end of this month release a list of additional cities that will impose limits on home purchases, citing an informed person. About 30 second- and third-tier cities may be on the list. Cities that have already imposed limits on the price of homes are also likely to be included on this list for limits on purchases, according to the report.

Economic Observer:

• China is requiring 22 more cities to obtain approval from the State Council for the usage of land for construction projects, citing a notice from the Ministry of Land and Resources. The government had previously required 84 cities to seek State Council approval for the use of land. Among the newly added 22 cities are Foshan, Jiaxing, Maanshan, Shaoxing, Sanya and Zhuhai, according to the report.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.50% to +1.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 159.0 +5.0 basis points.
  
• Asia Pacific Sovereign CDS Index 146.50 +1.5 basis points.
• FTSE-100 futures +.49%.
  
• S&P 500 futures +.70%.
  
• NASDAQ 100 futures +.72%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (HAIN)/.33
• (COCO)/.12
• (WSM)//.36
• (MDT)/.79
• (HNZ)/.76

Economic Releases
10:00 am EST

• New Home Sales for July are estimated to fall to 310K versus 312K in June.

Upcoming Splits

• (RYN) 3-for-2
  

Other Potential Market Movers

• The German/French Finance Ministers Meeting, Richmond Fed Manufacturing Index for August, Former Fed Chair Alan Greenspan speaking, 2-year Treasury Notes Auction and the weekly retail sales reports could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Slightly Higher into Final Hour on Eurozone Stock Gains, Short-Covering, Tech Sector Strength, Bargain-Hunting

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Mixed
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 42.19 -2.0%
  
• ISE Sentiment Index 102.0 +45.71%
  
• Total Put/Call 1.06 -19.08%
  
• NYSE Arms .86 -50.92%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 123.44 +3.99%
  
• European Financial Sector CDS Index 237.08 +11.41%
  
• Western Europe Sovereign Debt CDS Index 295.17 -.34%
  
• Emerging Market CDS Index 287.25 +4.18%
  
• 2-Year Swap Spread 32.0 +3 bps
  
• TED Spread 32.0 +2 bps
  

Economic Gauges:

• 3-Month T-Bill Yield -.01% -1 bp
  
• Yield Curve 189.0 +2 bps
  
• China Import Iron Ore Spot $177.80/Metric Tonne +.28%
  
• Citi US Economic Surprise Index -76.60 +5.9 points
  
• 10-Year TIPS Spread 2.04% +2 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +72 open in Japan
• DAX Futures: Indicating -18 open in Germany

Portfolio:

• Slightly Higher: On gains in my Tech, Medical and Retail sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges, then covered some of them
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is mildly bearish, as the S&P 500 trades just slightly higher despite recent sharp losses, tech sector strength and strong gains in European equities. On the positive side, Defense, Computer, Computer Service and Telecom shares are especially strong, rising more than +1.0% on the day. Tech sector shares have trades well throughout the day. On the negative side, Gaming, Hospital and Coal shares are under pressure, dropping more than -1.0%. Cyclicals and small-caps are underperforming again. (XLF) has traded poorly throughout the day. Gold is rising +2.27%, the UBS-Bloomberg Ag Spot Index is rising +.71%, Copper is falling -1.04% and Oil is rising +2.37%. Rice is still near a multi-year high, rising +28.0% in about 8 weeks. The US price for a gallon of gas is -.02/gallon today to $3.57/gallon. It is up .43/gallon in about 7 months. The Germany sovereign cds is rising +2.34% to 82.66 bps, the France sovereign cds is rising +5.16% to 157.83 bps, the Greece sovereign cds is rising +2.17% to 2,021.44 bps, the Portugal sovereign cds is gaining +4.37% to 940.02 bps, the Italy sovereign cds is rising +4.24% to 371.50 bps and the UK sovereign cds is rising +2.1% to 82.64 bps. Moreover, the European Investment Grade CDS Index is gaining +4.39% to 140.68 bps. The FRA/OIS Spread made a new multi-year high today and is rising +4.65 bps to 47.25 bps. The 3-Month Euro Basis Swap is falling -2.78 bps to -87.40 bps, which is back to its recent low. The 2-Year Swap Spread is very near its recent high and the TED spread is making a new multi-year high. The Eurozone Financial Sector CDS Index is surging to another new all-time high today. The Nikkei fell -1.04% last night and is approaching its tsunami lows in March. Korean shares fell another -1.96% last night and are down -16.59% ytd. Germany's DAX could not rally with the rest of Europe today and continues to trade horribly, falling -20.8% ytd. China's 7-day repo rate is surging +83 bps today to 5.0%. The UBS-Bloomberg Ag Spot Index is very close to its record high, which is a huge negative. The market remains very oversold. However, I still believe too many investors appear to be depending on the Fed to make some large announcement, which is a mistake, in my opinion, given recent inflation readings and the surge in food prices. As well, gauges of credit angst in Europe continue to deteriorate rapidly despite today's eurozone equity gains, which remains a large negative. I expect US stocks to trade mixed-to-lower into the close from current levels on financial sector pessimism, rising eurozone debt angst, tax hike fears, more shorting, global growth worries, emerging markets inflation fears and rising food/energy prices.

Today's Headlines

Bloomberg:

• Italy's Debt May Swell as Austerity Chokes Growth: Euro Credit. Italy’s austerity drive, enacted in exchange for European Central Bank bond purchases driving down borrowing costs, may backfire as it chokes the economic growth needed to ease Europe’s second-biggest debt burden. Prime Minister Silvio Berlusconi’s Cabinet approved 45.5 billion euros ($66 billion) in deficit reductions in Rome on Aug. 12, the nation’s second austerity package in a month, to balance the budget in 2013 and convince investors that Italy can trim debt of about 120 percent of gross domestic product. That’s the biggest ratio in Europe after Greece, whose fiscal woes sparked the sovereign crisis last year. While the back-to-back packages aim to eliminate Italy’s budget gap, spending cuts and tax increases risk damaging the economy at a time when the global recovery is stumbling. The measures, already in effect, require parliamentary approval that starts today as Senate committees review the law before both houses vote in September. “There are clear downside risks to growth emanating from such a sharp fiscal tightening profile, which could tip Italy’s fragile economy into a recession,” said Vladimir Pillonca, an economist at Societe Generale SA in London. That could “weaken revenue growth and undermine the ongoing fiscal adjustment” in the face of other challenges, such as “shocks to risk premiums and/or interest rates.”
  
• Bank Debt Risk Surges to Record After Merkel Rejects Euro Bond. The cost of insuring European bank debt surged after German Chancellor Angela Merkel rejected a common euro-area bond, stoking concern the region’s deficit crisis will worsen. The Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 banks and insurers climbed seven basis points to 242, according to JPMorgan Chase & Co. at 3 p.m. in London, after earlier reaching an all-time high 248.5 based on closing prices. The subordinated index jumped 21 to 430. Swaps on sovereign debt rose for a fifth day after Merkel said joint euro bonds would require European Union treaty changes that would “take years” and might run afoul of the Germany constitution. The Markit SovX Western Europe Index of swaps linked to the debt of 15 governments widened 3 basis points to 292 basis points. The cost of insuring company bonds also rose, with the Markit iTraxx Crossover Index of credit-default swaps on 40 companies with mostly high-yield credit ratings up 5 basis points to 675. The Markit iTraxx Europe index of 125 companies with investment-grade ratings widened 4 basis points to 160 basis points.
  
• Hedge Funds Boost Bullish Bets on Agriculture After Heat Wave. Speculators increased bullish bets on agricultural commodities by the most in a month after a U.S. heat wave increased speculation crops were damaged, adding to mounting concern that global supply will fall short of demand. Hedge funds and other speculators raised their net-long positions across 11 agricultural futures and options by 6.7 percent to 675,561 contracts in the week through Aug. 16, U.S. Commodity Futures Trading Commission data show. Bets on soybeans rose 25 percent and those on corn 9.6 percent. Wagers that wheat prices will decline were cut by the most in a month. Combined global stockpiles of rice, corn and wheat will drop 2.5 percent by the end of the harvests, to the lowest in five years, the U.S. Department of Agriculture estimates.
• Austria wouldn't have "massive benefits" if the euro area issued joint bonds, and it is doubtful whether they would have the highest credit rating, the head of Austria's debt agency was quoted as saying.
• Avoid Securitized-Debt Risk on Chance of 2008 Repeat, Bank of America Says. Investors should avoid taking risk in all categories of U.S. securitized debt because American and European policy makers may damage financial markets as they respond to a slowing economy and government deficits, according to Bank of America Merrill Lynch analysts.
• Gold Seen Heading for Biggest Annual Gain in 32 Years on Flight to Safety. Gold may climb the most in more than three decades this year as investors and central banks boost their holdings on concern that global economic growth may stall amid a worsening sovereign-debt crisis in the U.S. and Europe. Gold for immediate delivery may reach $2,000 an ounce by the yearend, extending this year’s gain to 41 percent, according to the median forecast in a Bloomberg survey of 13 traders and analysts at a conference in Kovalam in South India on Aug. 20. That would be the most since the 127 percent surge in 1979, according to Bloomberg data. The metal is set for an 11th year of gains as holdings in exchange-traded products reached a record on Aug. 8 and central banks are adding to their reserves for the first time in a generation.
• Prostitutes Flood Vallejo After City Slashes Police. When Ruth Rooney moved in 2005 to a two-bedroom house in Vallejo, California, near Napa Valley’s famed wineries, the historic St. Vincent’s Hill neighborhood attracted young professionals and there were few vacancies. Things began to change in 2008 after Vallejo, a city of about 116,000 that had lost its biggest employer, the U.S. Navy’s Mare Island shipyard, filed for bankruptcy, said Rooney, a 54-year-old marketing consultant. “I see prostitutes, pimps and drug dealers out my front window,” Rooney said in a telephone interview Aug. 5. “There’s two on the corner right now.” Her property value has dropped 70 percent in six years, she said.
• SPDR Gold(GLD) Wrests ETF Crown From S&P 500 Fund as Turmoil Reigns. Gold reached a new milestone in its role as an investment and haven, with the leading exchange- traded fund that tracks bullion surpassing its equities counterpart as the biggest ETF by market value. SPDR Gold Trust’s market capitalization rose to $76.7 billion on Aug. 19, according to the most recent data compiled by Bloomberg, as the metal topped $1,881 an ounce for the first time. SPDR S&P 500 ETF Trust (SPY), which has been the industry’s largest exchange-traded fund since 1993, stood at $74.4 billion, now 3.1 percent smaller. At the start of the year, the Standard & Poor’s 500 Index-tracking ETF was 56 percent larger.
• All Latin America GDP Growth Forecasts Cut Except Chile by Morgan Stanley. Morgan Stanley cut its forecast for Latin American economic growth this year and next, saying the region is “unlikely to be spared” from a global slowdown. The region’s economies will expand 3.6 percent next year from a previous forecast of 4.6 percent, as slower growth in Europe and the U.S. takes its toll on demand for the region’s commodities, Morgan Stanley’s chief Latin America economist, Gray Newman, said in an e-mailed report.
• BofA(BAC) Drops Most in S&P on China Construction Stake. Bank of America Corp. (BAC) led decliners in the Standard & Poor’s 500 Index after China Construction Bank Corp. said the U.S. lender will keep at least half its stake, spurring new debate on the American firm’s capital plans. Bank of America slipped 30 cents, or 4.3 percent, to $6.67 at 12:59 p.m. in New York Stock Exchange composite trading and sold for as little as $6.51. The lender, the biggest in the U.S., agreed to retain at least half its 10 percent holding, China Construction President Zhang Jianguo told reporters in Hong Kong. Some analysts, including Charles Peabody of Portales Partners LLC, had estimated the Charlotte, North Carolina-based bank would divest all of its shares.

Wall Street Journal:

• Tripoli Jubilant, Jittery Amid Pockets of Resistance. Libyan Insurgents Push to Heart of the Capital; Battles at Gadhafi's Compound.
• World Bank: Ready to Help Libya. As rebels entered the center of Tripoli in what could be their final battle with the regime of Col. Moammar Gadhafi, a senior World Bank official said the bank is ready to offer a new regime financial support if asked.
• Libya Oil Production Seen Staying Off Line. Key members of the Organization of the Petroleum Exporting Countries are in a holding pattern as the endgame in Libya unfolds.
• Mortgage Delinquencies Increase. The number of American households that fell behind on their mortgages increased slightly in the second quarter from the previous quarter, according to a survey released Monday, an unwelcome sign for the U.S. economy.
• Hurricane Hits Puerto Rico, Heads Toward U.S. Puerto Ricans awoke to flooded and debris-strewn streets Monday following the overnight passage of Hurricane Irene, which next took aim at the Dominican Republic on a path that could bring the storm to the U.S. by the end of the week.

CNBC.com:

• Chicago Fed Activity Index Improves in July. The Chi Fed's National Activity Index narrowed to negative 0.06 in July, following a revised negative 0.38 in June. But the three-month moving average, which provides a more consistent picture of national economic growth compared to the more volatile monthly index, increased to negative 0.29 from negative 0.54.
• Spending Cuts, Not Tax Hikes, Best For Deficit: NABE. The majority of economists surveyed by the National Association for Business Economics believe that the federal deficit should be reduced only or primarily through spending cuts. The survey out Monday found that 56 percent of the NABE members surveyed felt that way, while 37 percent said they favor equal parts spending cuts and tax increases. The remaining 7 percent believe it should be done only or mostly through tax increases. As for how to reduce the deficit, nearly 40 percent said the best way would be to contain Medicare and Medicaid costs. Nearly a quarter recommended overhauling the tax system and simplifying tax rates and exemptions. About 15 percent said the government should enact tough spending caps and cut discretionary spending.
• US Becomes Food-Stamp Nation, But Is It Sustainable?
• Greek Collateral Deals Put Bailout at Risk: Moody's. Euro zone states seeking collateral for aid to Greece should think again if they want its bailout to stay on track, a rating agency said, as one of them said it would only press for such guarantees as a last resort.
• Consumer Confidence Hits New Low, May Be Weaker. U.S. consumer confidence has fallen further after weeks of intensified economic concerns and broad stock market declines, and Conference Board data due later this month could be even weaker than current projections suggest, Consumer Edge Research said on Monday.

Business Insider:

• Maxine Waters: "The Tea Party Can Go Straight To Hell".
• Social Security Fund Could Run Out By 2017.
• In Pictures: The Fall of Tripoli.
• Wells Fargo Economists On Why It Still Makes Sense To Get A College Education.
• Taleb: Moral Hazard for Banks Has Never Been Greater.
• Chinese Military Slips Up and Broadcasts Cyberwar Campaign Against U.S. Targets.
  

Zero Hedge:

• The Squid: A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets.
• European Liquidity Summarized In One Chart.
• Bank of America(BAC) CDS Hits Escape Velocity. (graph)
  

cnet:

• Tablet Shipments to Near 250 Million in 2017. Tablet shipments are set to explode in the coming years, a new study from research firm In-Stat has found. According to the company's estimates, worldwide tablet shipments will approach 250 million units in 2017. The firm says iOS and Android will secure over 90 percent of the tablet space between them, while Windows will come in a "distant third."
  

CNN Money:

• Fears of Credit Freeze Grow in Europe. The sovereign debt problems in Europe have roiled financial markets around the world. With little relief in sight, investors are growing worried about the possibility of a credit crunch similar to the one that gripped the international banking system three years ago. "We're seeing signs of it starting already," said Patrick Bolton, a professor of finance at Columbia University. "The mechanism and the players are different but there's a very similar dynamic to what we saw in 2008."

FINalternatives:

• Icahn Makes $120 Million on Falling S&P. Icahn Capital turned a handsome $120 million profit last week on a $2 billion bet against the stock market, Bloomberg News reports. The giant hedge on his stock bets helped to offset losses on such investments as Clorox Co., which the veteran buyout artist is seeking to buy for $10.2 billion, and pharmaceutical company Forest Laboratories. Icahn boosted his borrowing by more than half to cover collateral for his bet against the Standard & Poor's 500 Index. His funds built the short position with derivatives with a face value in excess of $2 billion. The S&P proceeded to drop by 6% over the week, earning Icahn a paper profit of $120 million.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Monday shows that 20% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-four percent (44%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -24 (see trends).
• 55% Favor Repeal of Health Care Law. 55% at least somewhat favor repeal of the national health care law, including 44% who Strongly Favor it. Thirty-eight percent (38%) at least somewhat oppose repeal, including 27% who are Strongly Opposed.

Financial Times:

• Cash Crisis Drives USPS Towards Insolvency.

Telegraph:

• Bundesbank Questions Legality of EU Bail-Outs. Germany's Bundesbank has issued a blistering critique of EU bail-out policies, warning that the eurozone is drifting towards a debt union without "democratic legitimacy" or treaty backing.
• UK Household Finances are 'Worse Than During Height of Recession". Household budgets are deteriorating at a faster rate than during the height of the recession in early 2009, according to an analysis of consumers' finances.

Nikkei:

• Interview: Fed's Bullard Against Prolonging Zero-Rate Policy. The current monetary policy in the U.S. should not be extended with an eye on the calendar, but adjusted based on the state of the economy, Federal Reserve Bank of St. Louis President James Bullard told The Nikkei in a recent interview. The head of the St. Louis branch does not have a vote on the policy-setting Federal Open Market Committee this year. Edited excerpts from the interview follow.

Arabian Business:

• UAE Property Companies Shunned by Investors. United Arab Emirates’ property developers and contractors may struggle to tap the bond market until a glut of homes that’s weighing on prices is sold off.

Bear Radar

Style Underperformer:

• Mid-Cap Value (+.29%)

Sector Underperformers:

• 1) Coal -1.50% 2) Gaming -.91% 3) Hospitals -.89%

Stocks Falling on Unusual Volume:

• YZC, CRMT, MWIV, SAFM, MKTX, WPPGY, LNCR, SGI, CREE, SLXP, IRBT, RDWR, LCAPA, MNRO, PTRY, AREX, JAZZ, NTAP, ROSE, HAIN, SONO, SAM, GTU, SGEN, HFC and UPL
  

Stocks With Unusual Put Option Activity:

• 1) WDC 2) LEN 3) MOO 4) GM 5) NOK
  

Stocks With Most Negative News Mentions:

• 1) RAI 2) IPI 3) ETN 4) IR 5) BAC
  

Charts:

• ETFs Falling on Unusual Volume
• Stocks Falling on Unusual Volume